May 26, 2007

The flaws in the Chinese economic miracle

THE REALITY BEHIND THE WORLD'S WORKSHOP - The flaws in the Chinese economic miracle

Jean-Louis Rocca
Le Monde diplomatique, May 2007

China, with its unique mix of authoritarian government and rampant capitalism, is often portrayed as a fast-growing and malignant cancer that threatens the rest of the world's economies. But the reality is far more complex. China is struggling with mass migration, skills shortages and millions of unemployed graduates.

China and its teeming armies of workers seem to have become the focus of all our economic anxieties. We worry that the People's Republic will become the chief demon in a futur nightmare for our world: a capitalist-communist global power that combines leftwing authoritarianism with capitalist exploitation. We fear that our own people will become unemployed because of the outsourcing of production to China, the world's workshop.

But we have to think about Chinese labour differently, and not concentrate solely on the workshop aspect of the economy. We need to take account of a disparate, sometimes contradictory mix of economic, political and cultural elements. The labour-intensive industries with their industrial revolution exploitation affect only a fraction of China's enormous population. They cannot function on their own without interconnecting with other types of labour.

Agriculture is the only sector of the Chinese economy that has not been transformed by the new capitalism. Its labour force has not been turned into merchandise; the return to small family holdings of land has not led to new kinds of labour exploitation, nor has membership of the World Trade Organisation. Only collective ownership of land, currently being tested by a growing market in "utilisation rights" (1), still shows the traditional conservatism of the state. Agricultural labour policy remains highly political. There are of course considerations of food security, but the policy also allows the government to control a population that, if deprived of its means of production and social network, could turn migrant and invade the cities.

The government's aim is not to prevent migration but to regulate it; to prevent brutal urbanisation and allow migrants to return to their villages if the economy declines. The reality fits this strategy since most migrants do not see departure as a total break with their native villages. Agriculture remains as a fallback position, while the social network provides a structure for population movements, since most migrants are introduced to their employers by friends or family.

Around 120 to 150 million migrant farmers are subject to capitalist exploitation. More than half these peasant-workers (mingong) work in factories or on building sites. The remainder find jobs in catering and hotel businesses, retailing, security or even in garbage recycling (2). Some 80% of migrants abandon their land without actually leaving the countryside. They work in local industry; 50% never leave their native province. Their working conditions are not necessarily better than those of their peers in the global-supply sweatshops on the east coast, but their experiences do not match the traditional picture of the capitalist hell that is, for example, endured by China's miners.

Leaving for the cities

The authorities have changed the way they view migrations. Their social aspect was almost totally ignored during the 1980s and early 1990s, when liberal ideas about managing the labour force blended with a view that the migrations would not be large-scale or permanent. More recent developments, notably China's membership of the World Trade Organisation, have forced leaders to look more closely at rural employment. The stagnation of agriculture, and the importance to China's growth of the construction industry and sectors that are not capital intensive, have made the migrations strategically valuable. Researchers and civil servants now predict the progressive urbanisation of a large segment of the migrants, and some believe their living conditions should be improved to boost slackening domestic consumption.

The government is even considering an economic policy for migrants which includes housing them in cities hit by property speculation, giving those with no social security access to health care, educating their children (most have no access to schools) and persuading bosses (not just
capitalists but the heads of state construction companies) to actually pay their workers. These are not just grand philosophical principles, nor are they the effect of outside influences on Chinese disorder. These vital issues will set the conditions for continued growth in relative social

A trend that could be called "social capitalism" has emerged, popular among sociologists, journalists, congress delegates, civil servants and Chinese Communist party (CPP) members, which holds that while capitalism is good, it must go hand-in-hand with social policy. Proponents believe that a mechanism for redistributing wealth is necessary; wage increases for the lowest paid would boost flagging domestic demand.

The same people defend the idea that Chinese society should become more middle class as the only way to prevent a class war between rich and poor; and they believe some migrants should have access to this new middle stratum. This idea clashes, sometimes violently but usually discreetly, with the views of the free marketeers, who disapprove of social policy. The division doesn't reflect the reformist/conservative divide, though.

Some social capitalists have a nationalistic vision of capitalism and dream of Chinese state multinationals ruling the world. Others favour amore mercantilised capitalism. The economic liberals are not united; some are ultra-liberal, others favour a modicum of social policy. A hardline economic liberal may be a virulent anti-democrat and believe that only a strong government can control the market, and be hawkish in
international relations. The labour issue has arisen at a time when a small elite, not just CCP leaders and senior officials but also "elected" representatives, leaders of mass movements and the intelligentsia, is expressing a wide variety of opinions.

Adopting a social policy for migrant workers raises financial problems and might affect the future of the Chinese economic miracle. Many leaders ask if raising the cost of labour and providing social benefits might not be detrimental to China's competitiveness. Some point to the shortage of unskilled labour in certain areas of Guangdong province and ask if it is the result of a refusal to accept the conditions and wages
offered by the world's workshop, or the result of recent massive investment to open up the Chinese west? Or is it a demographic effect of the one-child policy (3)? The answer is probably "all of the above".

Migrants are not going home

It is clear that improved wages and living conditions, especially in Shanghai and in Fujian province where employers complain less of a labour shortage, have tempted many migrants to leave Guangdong province and head north. Perhaps migrants now have better knowledge of the labour market. The recent 23% increase in the minimum wage in Shenzhen shows that the remuneration of the new working class is a major issue. The mass return of migrant workers to the country is now considered hypothetical; surveys show that many farmers believe that their own futures lie in the cities. And the development of western China is only beginning. Perhaps the geographic trend is a result of changes in production along the coastal region. Labour-intensive industries are gradually moving to central China, while the eastern seaboard is turning to higher value-added employment. This redistribution would explain the emergence of a few local social security initiatives; companies on the coast need to ensure that they have access to a better-skilled and stable workforce.

China also has unemployment, which should be remembered by those who see it as the empire of labour. The official unemployment rate may be low; 4.1% of the urban population in 2006, although this does not include unemployed migrants or "off-post" workers who have lost their jobs but still depend on their company (the xiagang zhigong) (4). Nor does it include the unemployed who have reached the end of their entitlements, or the young jobless who have never paid contributions and are not entitled to benefits. Though there has been a significant increase in job applications since 2004, these are mostly for "informal" jobs (feizhenggui) without contract or social security. In urban areas "official" jobs are in the minority. Many former state employees remain out of work or only find jobs in the informal sector as auxiliary traffic police or security guards (5).

The most recent estimates reveal a tense situation. In 2006 the state provided 25m jobs for the urban population, 9m of them to labour market entrants, 3m to migrants (that this category was mentioned at all shows how the official line has changed) and 13m to workers who had lost jobs because of restructuring in the state sector. In reality, only 11.84m work contracts with social security entitlements were created
in 2006 (6). This year 24 million young people are expected to enter a labour market with only 12m new jobs (including places left by retirees) (7). The gap will be filled in part by unofficial jobs.

Effects on the young

The repercussions of the industrial restructuring in the second half of the 1990s that ended the jobs of millions of workers are still being felt. Urban unemployment is no longer confined to the older generation of "iron rice bowl" workers. The pretexts used to get rid of them implied that this
surplus generation was unable to adapt to market change and had to be sacrificed to make way for better-educated and more adaptable youth. But research in 2005 in the cities of Dalian, Tianjin, Changsha and Liuzhou showed that unemployment among 15-29 year-olds was 9% compared with 6.1% for the urban population as a whole.

According to Shen Jie, a sociology researcher at the Chinese Academy of Social Sciences: "Most young people are in jobs with no social security or stability. They work long hours for poor wages." These are unskilled school leavers with the equivalent of a high-school diploma. They are unlikely to be in competition with the migrants for dirty jobs but do not
have the training for jobs in the new sectors.

Cohorts of jobless young people are looked after by residents' committees and street offices, the lowest administrative levels. They are given temporary tasks in the non-trade community sector such as security or maintenance, or hold low-level jobs in the trade-related activities that
are developing, such as hotels, restaurants and stores. Quotas are reserved for them in jobs considered inferior but still better paid and more highly prized than those given to the migrant workers. These young people are gradually forming a welfare-supported proletariat between the middle class and the migrants. The better off may refuse lowly jobs and live off their parents, who, if they can afford it, may send them
abroad to obtain a qualification from a second-rate business or hotel management school. (France is one of the most popular destinations.)

But unemployment also affects young graduates. These have risen from 1.07 million in 2000 to 4.13 million in 2006; by 2010, 23% of the young will be graduates (8). The Chinese economy is having trouble absorbing such numbers. They were almost half the 9 million young people who entered the labour market in 2006 expecting to find work in the "new sector". An estimated 60% of 2006 graduates did not find jobs that year.

There is a paradox; major Chinese and foreign enterprises complain of a shortage of skilled, tech-savvy labour, yet young graduates are unable to find jobs (see `Graduates without prospects', left). Employers claim that their education does not reflect market requirements, and there is
a lack of mobility among job seekers. China's development model is still predominantly based on unskilled labour. Graduate starting salaries are very low. According to a survey in 2005, 20.3% earn less than $129 a month and 65.4% get a maximum $259. These low financial rewards are hardly likely to foster a new Chinese middle class.

Few hard facts

Faced with the seriousness of the situation, the last session of the National People's Congress discussed a law promoting employment and setting some major objectives; to improve coordination between the cities and the countryside, provide free "job shop" services, remove all segregation in employment, bring in new measures for unemployed young people without university or secondary school qualifications,
develop professional training, and provide greater assistance to young graduates in finding their first jobs. But translating these measures into reality depends on what concrete measures national and local authorities will take.

There are few hard facts about Chinese labour. Surveys are infrequent and fragmentary and the categories used in official statistics are rarely reliable. The labour force is used according to political/economic thinking primarily motivated by stability. The existence of a state-aided sector limits competition between urban and migrant workers. The
state is able to keep part of the population in the countryside by maintaining a traditional sector of activity there, while restricting the flow to the cities. Modern jobs being developed in sectors such as telecommunications, finance and advertising provide jobs for some children of former state workers left by the wayside following the restructuring of state enterprises. The government enables these young people, who will fill future, or existing, employment needs, to join the workforce and work their way up to more sophisticated production.

This would not be possible with a fully centralised and all-knowing labour management policy which would result in growing unrest. The police are likely to have a different point of view of social stability in relation to migrant living conditions than would cadres in charge of economic policies or social security management, or ideological chiefs
and the official unions. These potential differences of opinion provide opportunities for action by associations defending the rights of migrants. They can explain that the best strategy is to show local government and bosses that a well-treated workforce is both more efficient and more
stable. This would gain them the support of many trade unionists who hope that the present conflicts between workers and private-sector bosses will make their movement legitimate. As one explained:"Opposing the illegal actions of capitalists does not mean opposing government policy. On the contrary, it means upholding the law."

(1) Land remains state-owned but the farmers own the right to
use it and hence to rent it.

(2) Major Chinese cities are mostly cleaned by these
recyclers who wander up and down the main streets in search
of waste that can be sold (at a low price) to salvage

(3) Chinese economists are having a lively debate on this.
See Philip Bowring, "Labor need haunts China", International
Herald Tribune, 8 April 2006.

(4) These are workers who have been laid off but are still
being paid by their work units. This category will soon
disappear and the xiagang zhigong will gradually join the

(5) See Martine Bulard, "China breaks the iron rice bowl", Le
Monde diplomatique, English edition, January 2007.

(6) 2006 Chinese government report.

(7) 2007 Chinese government report.

(8) See David Langue, "Chinese paradox: A shallow pool of
talent", International Herald Tribune, 25 April 2006.

Translated by Krystyna Horko

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